Being innovative is seen as increasingly important for organizations as they attempt to deal with the rapidly changing world they operate in.  How would listing on the stock market influence that drive for innovation?

A recent study set out with that very question in mind and discovered that this particular route to new capital can actually have an adverse affect on ones ability to innovate.  In other words, the very act of going public can hinder the organization in doing what made it successful in the first place.

Innovation and the stock market

The paper highlights how the route to initial success is often paved by innovation, but then in order to grow, companies seek out extra capital via the stock market.  This has a profound impact on the kind of innovation those firms undertake.

“Going public is a mixed bag for firms when it comes to innovation. After an initial public offering, firms tend to introduce a larger number of innovations and a larger variety of each innovation–think different flavors, or different package sizes. But at the same time the innovations they do make are usually not the kind of breakthrough innovations that take the company in new directions and into new markets,” the authors.

The study is valuable because it doesn’t focus on patents or R&D expenditure, but rather on the actual products that make it to market.

The researchers analyzed some 40,000 new product launches over a 31 year period in the consumer goods industry, both in terms of the number of products launched each year, and the kind of products they were.  For instance, were they targeting new markets or offer new consumer benefits?  In other words, were they innovative?

Stock market conservatism

The results revealed that when companies had shareholders to answer to, it prompted a much more short-term focus, which typically meant that innovations were far less risky, and therefore far less revolutionary in nature.

“Our results suggest that the stock market not only absorbs information, but also generates an incentive structure that impacts managerial decision-making regarding innovation,” the authors conclude.

So if you want groundbreaking innovation, perhaps it’s best not to look in publicly listed companies for it.